George Soros provides fantastic insight into global currencies, the renminbi peg, the great crisis, financial sector reform etc in these conversations with Chrystia Freeland, US managing editor of the Financial Times. You can find the lectures here: Part 1, Part 2, and Part 3.

I was invited by Matthew Bishop, the U.S. editor of The Economist and author of Philanthrocapitalism, to contribute a piece to an issue of Alliance Magazine that he's guest editing. The focus is on "discontinuous thinking for a crisis." Here is my piece on catalytic philanthropy in full.

With free markets in retreat, economic development risks losing one of its foremost drivers. People forget that economic growth in India and China alone, fostered by open markets, has lifted hundreds of millions out of absolute poverty over the past 15 years. A crisis is a terrible thing to waste, so this is a good time for capitalism's greatest beneficiaries to bring its sheen back. Philanthropy can play a pivotal role in catalysing markets and market-based solutions that promote inclusive economic growth in developing countries. 

Developing countries are plagued by instances of mispriced risk, where the perception of risk is often far greater than the reality, which drives up the cost of capital. Though market clearance – in which supply is equal to demand so the market 'clears' – is a central tenet of free markets, a nudge is often required to kick-start markets. Philanthropic capital with a longer horizon can very effectively provide this stimulus, demonstrating a market opportunity into which commercial capital then flows.

Small and medium enterprises (SMEs) are traditionally an economy's largest job creator, so any developing country aiming for rapid and inclusive growth requires a robust SME sector. Contrary to popular opinion in venture capital circles, real investment opportunities may well lie in ‘bread and butter’ industries with a high or exponential correlation to GDP growth and huge social impact (waste management, for instance, or logistics and warehousing). The first true exit for a venture capital firm in India is likely to come next year in a business with a high social impact: microfinance. The bottom line in these businesses is that social and financial returns are not mutually exclusive.

There are several factors that retard the growth of SMEs, including lack of policy, limited knowledge networks and poor management skills, but availability of finance is key. Realizing this, the Soros Economic Development Fund, Omidyar Network and Google.org have set up the SONG[1] Fund at the Indian School of Business to invest in early-stage companies that will generate financial and social returns without compromising on either. There is enormous scope for long-term 'patient' capital to be deployed effectively. For instance, with 80 per cent of India's healthcare system in the private sector, our research reveals an opportunity to help build an asset management business around low-cost healthcare services.

Low-income housing is typically ignored in developing countries, and slums and shanties are a poor substitute. Market surveys in India have shown that there is a shortfall of 25 to 35 million houses in the $4,000 to $30,000 price segment. Our research shows that it is possible to generate internal rates of return of 40–60 per cent by building for the lowest end of the market. We have set up a for-profit housing company that will build houses for between $4,000 and $6,000, targeted at the working poor.

In doing so, we have identified several opportunities for catalytic philanthropic capital to play a role, besides the obvious as investors. There is a serious inability to access project finance, so anyone who can provide a first-loss guarantee can effectively catalyse the market and bring even smaller developers to the table. Similarly, end customers in the developing world can incur severe penalties for defaults and late payments arising from cyclical cashflow problems such as illness or unemployment. A payment protection insurance plan funded initially by philanthropists could offer incentives to mortgage providers and banks to offer loans.

The CARE Protected Note, developed by Derilab SA of Switzerland, offers investors the option to support a large low-income Pakistani school system that is based on a public-private partnership, and to participate in a structured product with capital protection at maturity. A yearly coupon will be paid to the CARE Foundation only if the school system grade average is greater than the regional average; if not, the coupon is returned to the investor. The CARE Protected Note offers the investor a tradable and liquid financial product, where investments in a liquid underlying asset generate positive returns. This mechanism not only provides incentives for all parties, and protection and returns to the investor, but also sources capital for charitable projects that is more sustainable than donations.

These three examples of innovations clearly show that the 'base of the pyramid' market segment needs more financial ingenuity, not less. Many more exist. Most just need a nudge from smart philanthropic capital to see the light of day.

_{Dr Reuben Abraham is a professor and executive director of the Centre for Emerging Markets Solutions at the Indian School of Business, Hyderabad.}

_{1. SONG is an acronym for Soros, Omidyar Network and Google.}

I am doing some research into the installed power generation capacity in India. As of May 2009, these are the numbers, with another 80,000 MW expected to come online in the next 18 months. What better way to share than with a chart?

As you can see, the share of coal is dropping and of renewables on the rise. The real increase, however, will be in nuclear as the nuclear agreement kicks in. For those of you who are curious, here are the all the numbers (rounded off).

Total installed capacity: 149,392 MW

Thermal -- 95,152 MW
Hydro -- 36,877 MW
Nuclear -- 4,120 MW
Renewables -- 13,242

Those of you on my Facebook feed know I was at TED Global in Oxford this year. As always, TED blew my mind and I am going to embed a few of my favourite talks on here. While I wait for Henry Markram's talk on the Blue Brain project to go online, here is the other talk that really grabbed my attention: Paul Romer on Charter Cities.

 

 

If you want to know more, go here.
[link] posted by Reuben : 11:12 AM

Here is a book review I wrote recently for Insight, an in-house publication at the ISB.

A good financial crisis is a terrible thing to waste. Especially for historians.

I don’t always like Niall Ferguson’s interpretations of history, especially his seeming high regard for imperialism, but the fact is he is one of the most influential historians of the last decade. From his perch at Harvard, this British historian has written about everything including World War I, the Rothschilds, the British empire and the savagery of war in the 20th century.

In the Ascent of Money: A Financial History of the World, Ferguson provides an easy to digest financial history of the world. The book is a romp through history from Babylonian credit systems to Pizarro’s search for El Dorado, to the birth of modern banking in Northern Italy, through to collateralized debt obligations and the spectacular collapse of the financial sector in the last year.

In the process, Ferguson introduces the reader to colourful characters and interesting historical episodes. We get to meet a Scottish outlaw and murderer named John Law, who Ferguson argues was partly responsible for the French revolution by unleashing a stock market bubble that ended up destroying the French financial system. Ferguson suggests that the Dutch prevailed over the Habsburgs because having the world’s first modern stock market (and access to a thriving bond market) was preferable to owing the world’s biggest silver mine. Most of us believe that it was the Duke of Wellington’s heroics that defeated Napoleon at Waterloo. Ferguson argues that Nathan Rothschild played an equally important part. Apparently, Rothschild used his experience as a gold smuggler to make vast quantities of continental gold available to the Duke of Wellington; paper money raised in Britain was of no use to Wellington to fight a continental battle. Possibly as a result, the Confederacy approached the Rothschilds for financing their campaign during the American Civil War. Was it a genuine distaste for slavery or was it that the confederacy was considered a huge credit risk by all investors?

Similarly, how did Great Britain, one of the safest countries on the planet, secure even from the vagaries of weather and geology, end up becoming the most insured country on the planet (12% of GDP spent on premiums)? Turns out the answer has something to do with the decline of the welfare state. Ferguson ends with a chapter on the interplay between the G2 or what he calls Chimerica, the two pre-eminent financial powers of today. In the latest version of globalization, the counter-intuitive flow of capital from east to west, i.e. Chinese savings to American spenders, may well have been responsible for the mortgage market crash.

Ferguson’s strength lies in being able to link the past with the present, though I wish he’d have spent a lot more time on the past. Will the current version of globalization end up the way the last version ended, in 1914? What, for instance, will happen to Chimerica if China raises a blue water navy and decides to take over Taiwan? Is history condemned to repeating itself?

At a time when finance has been taking a lot of flak, Ferguson provides a robust defence and ends with this coda: “financial markets are like the mirror of mankind, revealing every hour of every working day the way we value ourselves and the resources of the world around us. It is not the fault of the mirror if it reflects our blemishes as clearly as our beauty."